Question

You run a small business and would like to predict what will happen to the quantity demanded for your product if you raise your price. While you do not know the exact demand curve for your product, you do know that in the first year you charged $45 and sold 1200 units and that in the second year you charged $30 and sold 1800 units. a. If you plan to raise your price by 10%, what would be a reasonable estimate of what will happen to quantity demanded in percentage terms? (Since change in price and quantity is large, use the midpoint formula to calculate elasticity) b. If you raise your price by 10%, will revenue increase or decrease?

Answer 1

a) E = [1800-1200/(1800+1200/2)] / [30-45/(30+45/2)]

= [600/1500]/[15/37.5]

= 0.4/0.4

= 1

When you raise the price by 10%, the quantity demanded will change by 10*1 = 10%

b) The revenue will stay the same as the price elasticity is unitary elastic.